RBI Closes FCNR(B) Swap Window Early Due to Robust Inflows

Gist The Reserve Bank of India RBI has advanced the closure of its temporary swap window for Foreign Currency Non-Resident Bank FCNR B deposits by one month. Prompted by stronger-than-expected foreign inflows, the central bank calibrated its policy to manage rising domestic sterilization costs. For civil services aspirants, this highlights the intricate balance the central bank maintains between accumulating forex reserves for exchange-rate stability and mitigating the inflationary impact of excess domestic liquidity. Background - FCNR B Accounts: These accounts allow Non-Resident Indians to maintain deposits in designated foreign currencies, shielding the depositor from exchange-rate fluctuations. - The Temporary Swap Facility: Introduced in June , this special window allowed commercial banks to swap these foreign currency deposits with the Reserve Bank of India RBI , which temporarily absorbed the entire currency risk. - Mechanism of Sterilization: When the Reserve Bank of India RBI absorbs heavy foreign currency inflows to prevent excessive rupee appreciation, it releases an equivalent volume of rupees into the domestic banking system. - Cost of Excess Liquidity: To prevent this injected rupee liquidity from fueling domestic inflation,…